What the Job Market Means for the Stock Market

I know that everyone hates inflation and I understand why that is.

But it seems that people who are depressed about the economy because inflation is so high are missing the fact that the job market is on fire.

The unemployment rate has basically returned to pre-pandemic levels:

But Ben, is that just because no one wants to work anymore? Have you heard of the Great Renunciation?

It is true that never before have we seen so many people quit their jobs:

However, this is a good thing. It means that people are confident that they will find another job.

The Great Resignation needs to hire a PR agent. It should be renamed the Great Reorganization.

The number of workers of working age (25 to 54 years old) has just reached a new all-time high, surpassing pre-pandemic levels:

No, this is not a typo or graphic crime. You can see the labor force participation among this group1 it is also approaching pre-pandemic levels:

I know this goes against the prevailing narrative right now, but most people want or need to work.

Well, what about all the seniors who retired early?

It is true that there were millions of people who retired earlier than expected, but the labor force of the 55-and-older cohort is also almost back to 2019 levels:

The labor force participation rate for people over 55 has not yet recovered, but it is rising again and not far:

This graph of Bill McBride showing the current job recovery compared to previous post-WWII recessions is something else:

We just added 1.7 million new jobs in the first 3 months of the year alone.

That’s great, Ben, but what about the salaries?

Fair point. There are many workers who are seeing their wages grow but not as fast as the rate of inflation. That’s not cool.

Surprisingly, people in the lowest wage bracket are experiencing the highest wage growth. Just look at this graph of ben casselman:

Talmon Smith in the New York Times wrote an article this week about Nebraska, the state with the lowest unemployment rate in the country:

Nebraska’s unemployment rate was 2.1 percent in February, tied with Utah’s for the lowest in the nation and near the lowest on record for any state. In several counties, unemployment is below 1 percent. Even accounting for adults who have left the workforce, the proportion of the population age 16 and older employed in Nebraska is about 68 percent, the highest figure in the country.

This story about a bartender who is changing jobs because she keeps getting better offers says it all about who has the upper hand right now:

That included the evening shift waitress, Nikki Paulk, a quiet woman with a flash of pink hair. “I’m in high demand, baby,” she said, mentioning “desperate” employers with a smile. “I’ve worked in like six bars in the last six months because I keep getting better offers that I can’t turn down.”

Beyond inflation and employers struggling to hire staff, this all sounds like a wonderful development. Workers finally have some bargaining power.

The only other potential drawback I see here is that there probably isn’t much room for improvement from here. It’s like we’re rolling up the tube to try to squeeze out that bit of toothpaste from the list before moving on to a new tube.

The lowest unemployment rate ever in modern economic times was 2.5% in the early 1950s:

You can also see from this graph that low unemployment rates are often followed by a recession. Not all recessions start from low levels of the unemployment rate, but it is considered that recessions tend to come from excesses in the economy.

I have analyzed the relationship between the unemployment rate and the stock market in the past. Average future returns are higher when the unemployment rate is higher and lower when the unemployment rate is low.

This also makes sense as unemployment is higher during a recession, which is also when the worst bear markets occur.

Buying when the stock market is crashing is a very good long-term strategy.

Let’s look at this another way. Going back to 1948, I analyzed the worst results of the S&P 500two of different ranges of unemployment rates:

Again, this is the worst case, so this is not the base case, but you can see a clear relationship in the data here.

The potential for poor performance in the stock market is greatest when the unemployment rate is low. Investing when the unemployment rate is high is much safer.

I’m not saying that this means a recession is imminent.

Recessions are easy to predict except for the timing, magnitude and duration part.

With labor markets so strong, this recovery is likely to continue for a few more years. Who knows?

And even if we do enter a recession in the next few months or years, there is no way of knowing how the stock market will react.

My point is that sometimes the markets and the economy are contradictory.

Good times and bad times never last forever.

Other readings:
How to prepare for a recession

1The growth on this chart since the 1950s is also insane.

twoThese are total returns, including dividends, using monthly returns.

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